What Is A Reasonable Cancellation Penalty When A Residential Lease Agreements Is Terminated ITO Cons

In the unsettled current economic circumstances created by CV-19, tenants are often unable to continue with fixed-term residential lease agreements, resulting in early cancellation of the lease.

Tenants who are "consumers" in terms of the Consumer Protection Act ("the CPA") are entitled to early cancellation of a fixed-term lease. According to Waseen Goolam Hussain from Cluver Markotter Attorneys, section 14(2)(b) of the CPA provides that if a consumer agreement is for a fixed term, despite any provision of the agreement to the contrary, the consumer may cancel that agreement at any time by giving the supplier (landlord) 20 business days' notice in writing or in another recorded manner and form, subject to subsections 3(a) and (b).

This right to cancel cannot lawfully be ousted by a provision in the agreement to the effect that the lessee agrees that the lease agreement shall subsist for the fixed period "without the possibility of early termination". The parties cannot lawfully contract out of the right to early cancellation provided for in the CPA, but early cancellation may result in liability for a penalty. It should be noted that section 14 of the CPA does not apply to transactions between juristic persons, regardless of their annual turnover or asset value.

Section 14(3)(a)-(b) of the CPA provides that upon cancellation of a fixed-term consumer agreement, the consumer remains liable to the supplier for any amounts owed to the supplier in terms of that agreement up to the date of cancellation and the supplier may impose a reasonable cancellation penalty. The supplier may not charge a penalty which would have the effect of negating the consumer's right to cancel a fixed-term consumer agreement.

Regulation 5(3) under the CPA provides that the penalty or charge as contemplated in section 14 may not exceed a reasonable amount, taking into account the following factors:

1. the amount which the consumer is still liable for to the supplier up to the date of cancellation;
2. the value of the transaction up to cancellation;
3. the value of the goods which will remain in the possession of the consumer;
4. the value of the goods that are returned to the supplier;
5. the duration of the consumer agreement as initially agreed;
6. losses suffered or benefits accrued by the consumer as a result of the consumer entering into the consumer agreement;
7. the nature of the goods or services that were reserved or booked;
8. the length of notice of cancellation provided by the consumer;
9. the reasonable potential for the service provider, acting diligently, to find an alternative consumer between the time of receiving the cancellation notice and the time of the cancelled reservation; and
10. the general practice in the relevant industry.

These factors do not define a reasonable cancellation penalty, but provide guidelines for determining what would constitute a reasonable cancellation penalty on a case-by-case basis.

It appears to be general practice in residential lease agreements for landlords to make provision for the penalty that will be payable should the tenant exercise their right to cancel the agreement before the agreed expiry date, in apparent reliance on section 14(3)(b)(i). Often the provision reads that an amount equalling two or more months' rent will be payable as a penalty, usually because it is considered that two months is the time it will take the landlord to find a replacement tenant. This penalty provision is often also subject to the proviso that if a replacement tenant is found before the expiry of two months, a pro- rata amount will be returned to the erstwhile tenant. In some cases, the cancellation clause provides that the cancellation penalty will be determined at the time that the tenant exercises this right.

The cancellation penalty in terms of section 14 does not constitute damages for breach of contract: early cancellation of a fixed-term agreement by the consumer is a right afforded by section 14(2)(b) of the CPA and the exercise of this right is not a breach of contract. The penalty constitutes a charge for the anticipated losses suffered as a result of the early termination of the agreement. This charge must be reasonable and may be challenged by the tenant if it does not comply with the guidelines set out in Regulation 5(3) referred to above.

The purpose of a cancellation penalty is to discourage consumers from cancelling an agreement prematurely and to allow the landlord to recoup a loss suffered as a result of early cancellation. The right to charge a "reasonable penalty" as provided for in the CPA should not be confused with a claim for damages based on breach of contract: the consumer is legally entitled to early cancellation of the agreement, subject only to the obligation to pay a reasonable penalty.

The amount of the penalty recoverable by the landlord is calculated with reference to the factors listed in Regulation 5(3), by assessing the relevant factual situation. The assessment is factual and objective: the supplier does not have a discretion to determine the impact of the factors relevant to what constitutes a reasonable cancellation penalty in terms of section 14(3)(b)(i).